ECB watching excess liquidity closely - Liikanen

Reuters
Finland's Central Bank governor Liikanen speaks during the Euro Conference to mark the official launch of the Euro Campaign Estonia 2011 in Tallinn
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Finland's Central Bank governor Erkki Liikanen speaks during the Euro Conference to mark the official launch of the Euro Campaign Estonia 2011 in Tallinn September 20, 1010. REUTERS/Ints Kalnins

HELSINKI (Reuters) - The European Central Bank will pay particular attention to changes in excess liquidity in the banking sector as it seeks to keep down interest rates, Governing Council member Erkki Liikanen said on Tuesday.

He reiterated the ECB's pledge to keep rates low for a long time to come to support the still-fragile euro area economy, although he said the risk of returning to a full-blown crisis was smaller than before.

"The key ECB interest rates will remain at present or lower levels for an extended period of time," Liikanen said in a report by the Bank of Finland, of which he is governor.

"The Governing Council will also remain particularly attentive to the implications that changes in excess liquidity may have for the stance of monetary policy."

The ECB has emphasised its determination to keep a lid on market rates at its September meeting after a rise in such borrowing costs raised doubts over the ECB's promise of a long period of low rates.

The Bank of Finland said it expects inflation in the top 20 EU countries to be around 1.3 percent at the end of the year, and slightly over 1.5 percent in 2015, levels allowing the region's central banks to maintain easy monetary policy.

It said the global economic outlook was no longer deteriorating, but growth was sluggish. It also said the transmission of the ECB's accommodative monetary policy was "uneven" in the euro zone.

"In the countries that have suffered most from the crisis the level of output is still modest," Liikanen said.

Liikanen said a recently-announced deal among Finnish companies and key labour unions for a modest wage hike would help improve the competitiveness of Finnish industry and boost economic growth.

"The difference with the summer forecast is that growth next year would be 0.2 percent faster and in 2015 0.4 percent faster," Liikanen told a news conference.

That would lift the Bank of Finland's forecasts for Finnish gross domestic product (GDP) growth to 0.9 percent for next year and 1.8 percent for 2015.

(Reporting by Terhi Kinnunen and Ritsuko Ando; Editing by Catherine Evans)

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